Analysis: Calling for German stimulus

Germany is now sitting unattractively beside Japan in the negative-yield bond trap. And according to Bloomberg’s editorial board, the government should borrow more. In an editorial this week headlined Germany’s Obsession With Fiscal Prudence Needs to Go, it points out that the government has a fiscal surplus to play with, as well as insanely cheap money available, but is still prevaricating about stimulus packages.

Meanwhile, the German economy has endured one quarter of contraction and is looking at a second, which would fulfil the definition of a technical recession. Yet the bizarre consequence of the negative interest rate environment is that the government and the country are essentially paying to keep money standing still.

There could be plenty of very good arguments for a revision of the German economic model, but not on the deregulationist laissez-faire side. Germany’s economic model has long had critics from the international perspective because of its hypocrisy. The idea that prudent, modest, penny-pinching Germans can continue forever to export goods to more foolish parts of the world is a seductive one. But you can see the longer-term risks, above all when Germany is at the heart of an economic community whose health it depends on. The country’s vulnerability to the chaos of Brexit has been much remarked on lately, and that is just one sign of how dependent on conditions elsewhere it is.

There is also obvious appetite in Germany to change the country’s post-war consensus. Much of it, unfortunately, is showing in the rise of support for the far-right AfD, with the usual familiar populist anti-immigrant, anti-elite message.

The so-called grand coalition of the two main establishment parties seems to be accomplishing nothing like the kind of grand agenda you’d normally expect from such a union. Whether they have the kind of political will needed to deliver change may take second place as to whether they can survive at all as ruling parties. A policy platform of government borrowing and stimulus packages could hardly do them more electoral damage than they’re already suffering.

Furthermore, stimulus does not involve tearing up European restraint and adopting some kind of freewheeling Anglo-Saxon economic model. There are plenty of precedents for Germany from just over the border. Malaise is not a word we hear coming out of Paris much these days. If French President Emmanuel Macron can manage a turnaround in what was until very, very recently regarded as “the sick man of Europe”, then why not follow suit?